The 7 Most Important Equations For Your Retirement

An exclusive interview with bestselling author, Dr. Moshe Milevsky, discussing his new book, “The 7 Most Important Equations For Your Retirement.”

John Nyaradi: Hi, I’m John Nyaradi, Publisher of Wall Street Sector Selector. I’m talking today with Dr. Moshe Molevsky. He’s a tenured professor in the Department of Finance and a member of the graduate faculty of mathematics at York University in Toronto, Canada. He has graduate degrees in both Finance and Mathematics. He has written nine books, published a number of peer reviews and articles, over 200 magazine articles including a story in the Wall Street Journal, and he is a top expert in financial planning and retirement issues, having delivered over a thousand seminars and speeches around the world.

He’s a best selling writer; he has a new book out now and that’s what we’re going to discuss. The new book is titled The Seven Most Important Equations for your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income.” Moshe, it’s great to have you with us, thanks for joining us.

Moshe Milevsky: Thank you.

JohnNyaradi: So, let’s start at the top. Why did you write the book, Doctor, and what do you hope people are going to get out it?

Moshe Milevsky: Well, I wrote the book because I felt there was a need out there, there was a gap out there and I thought that the gap was some appreciation for the biographies and the life of the people that made retirement planning what it is today.

A lot of the calculations that we do to figure out whether we’re going to have enough and whether retirement is sustainable and when to retire were actually done by mathematicians, economists, actuaries and even astronomers hundreds of years ago.

So, what this book is really trying to do is to teach retirement planning by a process biologists call osmosis. You read about fascinating people and their lives and you learn about financial planning that way.

There are a lot of books out there that do financial planning; it’s a little bit dry, they throw numbers and charts and figures and asset mixes and investments at you and I thought that by focusing on these seven key people we’d be able to cover the same ground but in a more interesting manner.

John Nyaradi: That’s really a unique approach and everybody talks about “our number,” our retirement number, and what that might be. Your book is all about numbers so let’s start with Equation #1, developed by Leonardo Fibonacci, and what this all means.

Moshe Milevsky: Leonardo Fibonacci is very well known amongst traders and technical analysts who do technical trading. There is something known as the Fibonacci sequence or the Fibonacci ratio, and he’s also very well known for introducing Arabic Hindu numerals instead of Roman numerals.

All the calculations up until Fibonacci 800 years ago tended to be done with Roman numerals and he helped propagate the idea that we should be using the digits from one to nine and zero instead of old Roman numerals. I’m sure that many high school kids appreciate the fact that they don’t have to do long division with Roman numerals.

So, he’s very well known for that. What he’s less well known for is the fact that he was the first individual, to my knowledge and to many other researchers’ knowledge, who ever sat down to calculate how long your nest egg will last.

If you have a certain sum of money and you’re withdrawing money every single year to live from that nest egg, in how many years will the money run out if that investment is earning interest along the way?

He wrote down the algorithm for this and that’s why he is Equation #1. He taught us how long your nest egg will last and, practically speaking, his insight was it’s not going to be for a very long time in today’s interest rate environment.

If your money is only earning one or two percent in inflation adjusted terms, possibly less than that, that money is not going to last as long as you think and you better prepare for that today.

John Nyaradi: That’s good advice. We keep hearing about the retirement gap and how people are going to come up short and I guess part of that is longer lifespan, how long are we going spend in retirement. You talk about Benjamin Gompertz and his views on that subject.

Moshe Milevsky: Benjamin Gompertz is the second person that I profile and he was a demographer who lived 200 or so years ago. He was the first person to really write down models for human mortality to enable us to predict how long someone is going to live, statistically speaking.

So, when we talk about a couple that’s 65 and what are the odds they’re going to make it to 90 and what are the odds one of them will make it to 95, that calculation, what are the odds, is from Benjamin Gompertz.

Fascinating fellow, he was British. He taught himself mathematics. He wasn’t allowed to attend university. He was Jewish and they were quotas on those things at the time, so he literally learned mathematics on the street.

His hero was Isaac Newton who had formulated the laws of gravitation and he wanted to formulate a law of mortality, and he is now known, 200 or so years later, for formulating the first law of mortality. It’s called Gompertz’s Law of Mortality.

It’s extremely useful in the retirement business, the retirement calculations business, and it is a conversation everybody should have as they get closer to retirement. What are the odds you’re going to need that money for longer than you think?

John Nyaradi: We hear a lot about asset allocation and diversification, stocks versus bonds as you get older. In Chapter Five you talk about Equation #5, developed by Paul Samuelson.

Moshe Milevsky: Paul Samuelson is obviously very, very well known, possibly one of the most famous economists ever. He was a professor at MIT who passed away a few years ago and was the first American to win a Nobel Prize in Economics.

He wrote probably the most popular textbook ever in economics. He was a consultant and an adviser to Presidents all the way from JFK forward. He is literally almost a founding father of modern economics, but he had a beef, he really had a beef with people who thought that stocks became safe in the long run.

He really did not like the fact that people were holding on to stocks in the hope that, in the long run, markets will go up and that stocks will beat cash or bonds. He felt that time really did not make stocks any safer. His feeling was that time was almost irrelevant.

What really mattered was the safety and the security of your personal balance sheet, your job, the safety and security of your income, as opposed to how much time you have until retirement. So he really helped popularize the idea of asset allocation as a function of human capital as well as financial capital.

He would have said that what determines the asset allocation, more stocks or less stocks, is how safe is your job and how sensitive is it to the economy, the state of the economy. If your job depends very much on the ups and downs of the economy, you should not be investing in stocks regardless of how old or young you are. So, that was one of his important insights and that manifests itself in Equation #5 in the book.

John Nyaradi: I think one of the most important chapters in the book is Chapter 7 where you introduce Andre Kolmogorov. Would you discuss him a little bit?

Moshe Milevsky: Andre Kolmogorov was a Russian mathematician who spent most of his life in the Soviet Union in and around Moscow. He really founded the modern field of probability. When he passed away, his contributions were compared to what Euclid did for geometry. He did for probability what Euclid did for geometry.

He was a hero in the Soviet Union. I mean just to get a sense of who this person was, his obituary in the newspaper was written by Gorbachev. That’s how a big a deal he was. He won seven Orders of Lenin. He was really a hero, a scientific hero in the Soviet Union, and his contribution was to create the models that are used for measuring sustainability of the nest egg.

Anytime you go into a financial adviser or financial planner and they run a sustainability analysis where they say there is a 90% chance you will be okay or there is a 70% chance you will be okay, otherwise known as Monte Carlo, the first person to actually write down the equations that enable us to write those probabilities was Andre Kolmogorov.

So, I find it kind of ironic that the stockbrokers at Merrill Lynch and Goldman Sachs and Morgan Stanley, very capitalistic institutions, are relying on Communist mathematics to generate retirement income plans.

John Nyaradi: That is fascinating. With all the uncertainties in Europe and the economy, retirement is top of mind for everybody. As we’re talking here in the summer of 2012, what’s on the top of your mind, Moshe, what’s keeping you awake at night? What should be people be thinking about in regards to retirement and the future?

Moshe Milevsky: There are a number of things that worry me. I think that one of the things that doesn’t get as much play is understanding now that interest rates are very, very low, but sooner or later rates are going to go back to normal so we better be careful not to hold too much in bonds. Sooner or later the world will go back to normal, so we better be prepared for that.

What also worries me is the opposite situation, what happens if we stay in this state for a very, very long period of time. Uncertainty, low interest rates, no growth. I think what we have to prepare for – what worries me is if nothing changes. Not if there is a big unpredictable change, but if we stay in the current environment for a very long period of time, this uncertainty from day to day, low levels of interest rates, low levels of growth. I think that’s something that we have to prepare for, the fact that nothing major shifts in terms of the economy.

John Nyaradi: Folks, we’ve been talking with Dr. Moshe Molevsky. He is a tenured Professor in the Department of Finance at York University in Toronto, widely published author and expert on financial planning and retirement. His new book out from John Wiley & Sons is The Seven Most Important Equations for your Retirement.

It’s a great book and is high on the business best seller lists. I think there is a lot to be learned here and a unique opportunity to take a different angle and a different focus on retirement planning. You can learn more about Moshe and his work at the link at the bottom of this interview.

Moshe, thanks so much for joining us today, and I know we’re all looking forward to talking with you again soon.

Moshe Milevsky: Thanks, John, I enjoyed our talk.

Learn More about “The 7 Most Important Equations For Your Retirement

(recorded interview, edited for length and clarity)